Oil Heads for Annual Loss as U.S. Budget Talks Near Deadline

By Mike Anderson and Ramsey Al-Rikabi -
Dec 31, 2012

Oil fluctuated in New York, heading
for its first annual loss since 2008, as U.S. lawmakers tried to
bridge disagreements over how to avert tax increases and
spending cuts that threaten the world’s largest economy.

West Texas Intermediate futures were little changed after
sliding for two days as U.S. Senate Majority Leader Harry Reid
said there are “still significant differences” between Democrats
and Republicans with one day remaining to avoid the fiscal
cliff. A purchasing managers’ index for China by HSBC Holdings
Plc and Markit Economics showed a reading of 51.5 for December,
the highest in 19 months and the second above 50, which
indicates an expansion.

“Without reaching a fiscal policy agreement, demand for
U.S. oil could come off, and that could drag WTI down,” said
Gordon Kwan, the head of regional energy research for Mirae
Assets Securities Ltd. in Hong Kong, who forecasts oil in New
York to trade between $87 and $93 a barrel next week. “The
improved PMI number from China will add a cushion to oil prices,
despite the deadlock in Congress.”

Crude for February delivery was at $90.91 a barrel, up 11
cent, in electronic trading on the New York Mercantile Exchange
at 4 p.m. in Singapore. It earlier fell as much as 0.5 percent.
Prices gained 2.4 percent last week, a third consecutive
advance. They are up 2.2 percent this month, trimming the
quarter’s loss to 1.7 percent.

Brent oil for February settlement on the London-based ICE
Futures Europe exchange was at $110.40 a barrel, down 22 cents.
The contract climbed 1.5 percent last week. The European
benchmark crude was $19.53 more expensive than New York futures.

U.S. Output

West Texas crude has declined 8 percent in 2012 as the U.S.
shale boom deepened a glut at Cushing, Oklahoma, America’s
biggest storage hub and the delivery point for the New York
contract. That has left it at an average $17.44 a barrel below
Brent this year, compared with a premium of about 95 cents in
the 10 years through 2010. Brent, the benchmark grade for more
than half the world’s crude, has increased 2.8 percent this
year, headed for its fourth annual gain.

U.S. crude production rose to 6.984 million barrels a day,
the highest since 1993, in the week ended Dec. 21, the Energy
Department reported Dec. 28.

The House and Senate held an unusual Sunday session after
President Barack Obama on Dec. 28 asked Reid and Minority Leader
Mitch McConnell to try to find a solution. Both houses adjourned
by mid-evening and will resume today. The Senate will resume its
session at 11 a.m. Washington time and “perhaps” have further
announcements then, Reid said yesterday.

China Manufacturing

China’s manufacturing unexpectedly expanded at the fastest
pace in 19 months in December, boosting optimism that a recovery
in the world’s second-largest economy and oil consumer is
gaining traction.

The PMI reading of 51.5 was higher than the 50.9
preliminary reading on Dec. 14 and a final 50.5 in November. A
separate government-backed gauge probably rose to 51 in December
from 50.6 last month, analysts predicted before the data is
published tomorrow.

“The latest China PMI shows continuing expansion in
manufacturing activity which is supportive of oil,” said Victor Shum, a managing director at IHS Consulting in Singapore.

China will consume 9.9 million barrels a day of oil,
115,000 more than previously projected, in the last three months
of this year, the International Energy Agency said in its
monthly report on Dec. 12. The country’s apparent oil demand
climbed 9.9 percent in November from a year earlier to 10.5
million barrels a day, according to data compiled by Bloomberg.

Technical Drop

Oil in New York may extend its decline in 2013 as futures
are poised to end this year with a bearish technical formation,
according to data compiled by Bloomberg. The 2012 candlestick
overshadows last year’s, based on the opening and closing
prices, creating a bearish engulfing pattern on the annual
chart. Investors sold contracts to start the year after similar
candles formed in 2008 and 1997. A settlement today at or above
the 2011 open of $91.31 a barrel will cancel this chart pattern.

Net-long positions in WTI held by money managers, including
hedge funds, commodity pools and commodity-trading advisers,
increased by 13,783 futures and options combined, or 11 percent,
to 134,834 in the week ended Dec. 24, according to the U.S.
Commodity Futures Trading Commission’s weekly report on Dec. 28.